Prudential Regulation Authority Rulebook

1.

A firm must calculate the probability of default on a single name exposure as equal to the average of the probabilities of default on each of the exposures to counterparties that belong to the single name exposure, weighted by the loss-given-default in respect of those exposures.

2.

A firm must assign to a single name exposure i for which a credit assessment by a nominated external credit assessment institution is available, a probability of default PD_i in accordance with the following table:

3.

In respect of single name exposures i to a UK Solvency II undertaking for which a credit assessment by a nominated external credit assessment institution is not available and where this UK Solvency II undertaking meets its MCR, a firm must assign a probability of default PD_i depending on the UK Solvency II undertaking’s solvency ratio, in accordance with the following table:

Where the solvency ratio falls in between the solvency ratios specified in the table above, the value of the probability of default must be linearly interpolated from the closest values of probabilities of default corresponding to the closest solvency ratios specified in the table above, provided that:

(1) where the solvency ratio is lower than 75%, the probability of default must be 4.2%; and

(2) where the solvency ratio is higher than 196%, the probability of default must be 0.01%.

For the purposes of this rule, ‘solvency ratio’ denotes the ratio of the eligible own funds to cover the SCR and the SCR, using the latest available values.

4.

A firm must assign a probability of default equal to 4.2% to exposures to a UK Solvency II undertaking that does not meet its MCR.

5.

3E12.3 and 3E12.4 only apply as of the first date of public disclosure, by the UK Solvency II undertaking corresponding to the exposure, of the SFCR and before that date, the following applies:

1. (1) if a credit assessment by a nominated external credit assessment institution is available for the exposures, 3E12.2 applies; 
2. (2) in all other cases, a firm must assign to the exposures the same risk factor as the ones that would result from the application of 3E3.3 to exposures to a UK Solvency II undertaking whose solvency ratio is 100%.

6.

In respect of exposures to a third country insurance undertaking or a third country reinsurance undertaking for which a credit assessment by a nominated external credit assessment institution is not available, situated in a third country which is an overseas jurisdiction designated under regulation 11 in relation to regulation 13 of the IRPR regulations in respect of the insurance group capital requirements calculation, and which complies with the solvency requirements of that third country, a firm must assign a probability of default equal to 0.5%.

7.

In respect of exposures to credit institutions and financial institutions which comply with the solvency requirements set out in the PRA Rulebook, the CRR or technical standards as amended from time to time, for which a credit assessment by a nominated external credit assessment institution is not available, a firm must assign a probability of default equal to 0.5%.

8.

A firm must assign a probability of default equal to 0% to exposures to counterparties referred to in 3D24.2(1) to (3)

9.

A firm must calculate the probability of default on single name exposures other than those identified in 3E12.2 to 3E12.8 as equal to 4.2%.

10.

Where a letter of credit, a guarantee or an equivalent arrangement is provided to fully secure an exposure and this arrangement complies with 3G2 to 3G9, a firm may treat the provider of that letter of credit, guarantee or equivalent arrangement as the counterparty on the secured exposure for the purposes of assessing the probability of default of a single name exposure.

11.

For the purposes of 3E12.10, a firm must treat exposures fully, unconditionally and irrevocably guaranteed by counterparties listed in 3E1 as exposures to the central government.

12.

Notwithstanding 3E12.2 to 3E12.11, a firm must assign to exposures referred to 3E4.5 a probability of default equal to 0.002%.

13.

Notwithstanding 3E12.2 to 3E12.12, a firm must assign to exposures referred to 3E4.6 a probability of default equal to 0.01%.